Sibanye Sets its Sights on Burnstone

Sibanye Gold began the year with the enviable reputation as the world’s lowest cost producer, but the recent acquisition of cash-burning Burnstone may change that

By Gavin du Venage, South African Editor

Sibanye Gold may be a new company but its Driefontein complex has been producing gold since the end of World War II. (Photos by Gavin du Venage)

Success is the best form of revenge, they say, and as such, Sibanye is dishing it out in spades. The once-unloved orphan child set adrift by Gold Fields has seen its share price more than double since it was listed in February last year. The company continues to squeeze life out of three older assets it took control of at its foundation, Kloof, Driefontein and Beatrix. E&MJ was invited along for an underground inspection of the venerable old lady of the three, Driefontein.

Gold was first discovered in the Carltonville area west of Johannesburg in 1939. War interrupted the development of the deposit but began days after the U.S. bombed Hiroshima. Ever since, Driefontein has steadily produced gold.

“Shaft 10 is probably the most productive gold shaft ever, producing 2 tons a day in its heyday,” said Koos Barnard, vice president of the Driefontein mine. “Even now, the mine continues to be a valuable asset—last year it delivered nearly $100 million in profit to the group.”

Gold mineralization occurs at depths between 3,200 ft and 13,000 ft below surface. Two major orebodies, the Carbon Leader Reef (CLR) and the Ventersdorp Contact Reef, are the major contributors to production with a third, the Middelvlei Reef, making a small contribution. The CLR comprises various facies from single carbon seam to single and multiple band conglomerates. It is a high-grade reef at the base of the Central Rand Group, and at Driefontein it dips at 25°.

Keeping the network of shafts and access tunnels operational is quite an undertaking. The complex spans 68 miles. “We have 27 holes leading into the mine, shafts and vent shafts,” Barnard said.

Because it lies under porous dolomite formations, flooding is a constant threat. Around 26 million gallons a day are pumped out, at a cost of nearly $100 million annually.

Production is running at roughly 700,000 oz/yr and is expected to remain at this level, gradually tapering off from 2022. Currently, life of mine extends to about 2030 with the last few years of production coming from support pillars as the mine is gradually shuttered.

However, Driefontein may yet live on beyond her projected years. Technical studies are under way to exploit “white areas”—potential project zones that were left intact because of cost or engineering challenges.

A study by previous owner Gold Fields indicated that 8.8 million oz of gold could lie below the mine’s existing infrastructure, which has reached a depth of 2.1 miles. The deepening of No. 9 subvertical shaft would extend Driefontein’s life by at least 13 years to around 2035. The company has also been evaluating the recovery of high-grade CLR pillars from the No. 10 Shaft complex.

There’s also the possibility of a drop down shaft below the lowest level of the No. 5 shaft. “We are looking at all of our options,” said Barnard. “We have plans for the last shaft standing, but are also looking at ways to extend the mine’s life, and the cost implications it will have to the company.”

He echoed the message that the company’s executive team had repeated, it seemed as often as they could: “It will all depend on how it affects cash flow—nothing will be done unless there’s a business case.” In all likelihood, sublevel development will take place incrementally, he added. “A big bang is not necessarily the best way forward. A gradual incline shaft may be a better option than a vertical shaft being sunk.”

So far, the numbers are looking satisfactory.

During the six months to December, group gold production increased 18% from the previous six months to 774,600 oz; cash costs fell 12% to $804/oz; and it has increased reserves 46% to 19.7 million oz, extending the life of its mines by five years to more than 13, according to the company’s annual report.

Given its success and a comfortable production outlook, it’s perhaps not surprising that CEO Neil Froneman is on the hunt for new assets. He has indicated that Sibanye is talking to platinum producers about an acquisition, as well as other opportunities.

It’s the acquisition of the Burnstone mine, the troublesome deposit to the east of Johannesburg, that could determine the company’s long-term fate.

Currently, Sibanye is digesting Wits Gold, following a R407 million ($38 million) bid made in December. This will give it a sizeable land holding in the Free State and access to the newly built Burnstone in Mpumalanga province, which Wits is buying from the liquidators of Great Basin Gold.

Koos Barnard, vice president of Driefontein, says the mine produced up to 2 tons of gold a month in its heyday.

It will now fall to Sibanye to pick up the tab to bring the Burnstone mine into production of about 100,000 oz a year. Sibanye may have proved itself in managing costly deep level mines, but Burnstone, a relatively shallow deposit with complicated geology, may be harder to master.

Burnstone has already brought one company to its knees and forced another to seek a white knight to come to its rescue. Construction began in 2006 by Canada-listed Great Basin under the stewardship of CEO Ferdi Dippenaar. It soon ran into trouble, producing only 38,000 oz of gold before being placed on care and maintenance in mid-2012.

Great Basin went into business rescue and Burnstone was acquired by Wits Gold.

“If we fail at Burnstone, then that’s the end of Wits Gold,” Wits CEO Philip Kotze told Miningmx in July 2013. “We have got an opportunity to reposition this mine. It was certainly the lowest risk mine that we could get into operation by a long way,” he said.

By December, however, Kotze’s optimism had given way, as he told Business Day: “We are in difficult times now, if you look at where the markets have been for the past year. There’s not a lot of capital around.”

Sibanye now hopes to turn this difficult asset into a profitable mine. Although the price for Wits Gold was relatively modest, it will require a formidable investment to return Burnstone to production.

“Burnstone was acquired at virtually no cost but Sibanye needs to spend around R1.3 billion ($123 million) over the next 3-4 years to bring the mine to life again,” said Kobus Nell, resource analyst at Stanlib.

The mine has 6.4 million oz of reserves and a 21.7-million-oz resource. Nell said Burnstone is a high-risk asset that is difficult to mine because of very thin channel widths and highly carbonaceous rock, with a high-dilution risk.

According to previous owner Great Basin Gold’s website, which at the time of this writing was still up, Burnstone consists of placer deposits hosted within coarse-grained sediments deposited in braided stream channels on broad river plains. Economic gold concentrations commonly extend for several kilometers down the dip, and for up to 50 km along strike of the sedimentary rock units. Gold occurs as detrital grains in nugget-like shapes and secondary re-crystallized grains, ranging in size between 0.005 and 0.5 mm in diameter.

“The issue in the case of Wits Gold originally was more around a lack of project capital to see the development through,” said Nell. “The type of mine development that they opted for was supposed to bring positive cash flows forward, but never materialized due to their inability to manage the underground dilution factor.”

This left the company in a position of not having enough operational cash flow to fund further development, he added.

“Froneman has, however, shown the ability to turn assets around, but some still question the level of sustainability. The strategy on Burnstone may be to try and run a very lean operation, gain access to low hanging fruit and deliver much improved results. However, sustainability is dependent on further reserve development. This requires capital that could conflict with Sibanye’s ‘high dividend paying’ proposed strategy,” said Nell.

A central question to Burnstone’s return to production will be whether it will continue to use a narrow stoping mechanized mining method that was initiated by Dippenaar. It was the move to mechanization—at odds with the convention of labor intensive mining in South Africa—that was ascribed to Burnstone’s cash drain that eventually sunk Great Basin. Dippenaar through a spokesman declined to comment.

Complex geology has defied mechanization and Driefontein still relies on traditional hand drilling. Sibanye plans to use the same methodology at Burnstone.

“The reason why the previous companies failed was because of the mining method used,” said Sibonginkosi Nyanga, equity research analyst at Imara S.P. Reid Stockbrokers. “Dilution resulted in more waste being sent to the mill resulting in very low yield. The long-hole stoping method failed and I think there is a need for a change in the mine design and mining method.

The conventional breast stoping might do the trick and a switch in the mining method will require a major change in the mine design.”

The mine, reasonably shallow in terms of gold mining in South Africa, has two shafts—a decline shaft to move machinery in and out of the operation and a vertical shaft for transporting men and materials, as well as rock-hoisting. Ventilation and water conduits are accommodated in the vertical shaft.

Extensive stoping in mined out areas is giving access to lower grade deposits known as ‘white zones’ to extend Driefontein’s life.

Sandvik twin-boom drill jumbo, LHDs and 30-metric-ton underground trucks formed the basis of the operations’ mechanized fleet. It was in all respects a state-of-the art operation, yet it failed.

“The first thing everyone asks is why we bought it,” Richard Stewart, senior vice president of business development at Sibanye, said at a special analyst briefing held recently, “…and our response is, it was a great deal.”

Stewart said the company paid a nominal $7 million for Burnstone, which included its debt of $177 million that comes ring-fenced to the mine itself so protecting Sibanye from historic financial liability.

“It takes 10 years to develop a mine—and all that work has already been done and so the project is already mostly de-risked. There’s been $500 million in capital already spent. How can you not do it? To start a project from zero with most of the work already done is a unique position to be in,” Stewart said.

Much of the issues with the mine are related to an overly ambitious mechanization plan, as well as attacking an ore body that was poorly understood. “You cannot mine the entire deposit,” Stewart said. “It has to be worked selectively.”

Stewart said the approach will use conventional and well-understood mining layouts. Selective breast mining with scraper cleaning will be used at the stope face, with a mechanized footwall infrastructure implemented.

Mine workers have to take three different shafts to access the lower levels of Driefontein.

Mechanization on reef will be removed to reduce dilution and higher grade blocks will be targeted first.

Extensive drilling has also taken place—under previous owners as well as by Sibanye. “More than 460 boreholes have been sunk. That’s more than any other mine on the Wits basin,” said Stewart.

There’s still work to be done. A detailed sediment and structural modelling study has begun, and all boreholes will be re-logged. A detailed seismic survey will be carried out next year.

“By carrying out a detailed review of the ore body and using appropriate and understood mining methods, we think we can take the risk out of the project,” Stewart said.

In the meantime, the company is still on the lookout for deals. “We have been through the front door of every major platinum producer, but have no specific targets,” said Froneman. “We will look at anything—gold or platinum. But unless it enhances earnings—and, by that, we mean within two to three years—we won’t do it.”

Sibanye will probably be closely watched in the next few years. It stands out as a wildly optimistic feel-good story in an industry struggling with a relentless flow of bad news. At a time when its peers are nervously eying the door, Sibanye is for now resolutely committed. “We have decided to position ourselves as a South African-focused company,” Froneman added. “We are happy with that.”

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